Classroom Companion: Business

11.5 
 Conclusions
We have seen that several business cases in the digital economy cannot be explained 
by standard microeconomic theory. Microeconomic theory postulates that the 
market always ends up in a single predetermined equilibrium. Two cases analyzed 
in this chapter, VHS vs Betamax and Facebook vs Myspace, both end up being a 
winner-takes-all market. Either of the competitors could have won the market war 
so that there are two stable market equilibria in this case. That Facebook and VHS 
won the competition is just luck and help from external events working in their 
favor. The evolution of these markets is said to be path dependent.
Path dependence is caused by positive feedback from the market stimulating 
growth of some competitors resulting in loss of market shares for other competi-
tors. Sometimes, one of the competitors will capture he whole market. As we have 
Time
Market share
Positive feedback event 1:
Users leaving service B to
join service A 
Service A
Service B
Positive feedback event 2:
Users leaving service A to
join service B
. Fig. 11.4 Path dependent evolution with two positive feedback events. (Authors’ own figure)
 
Chapter 11 · Path Dependence

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seen in this and previous chapters, positive feedback is common in the digital econ-
omy. Therefore, it is particularly important to be aware of path dependence and the 
influence it may have on both establishment of new businesses and competing with 
other businesses in the digital economy.
 
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Questions
1. AltaVista was launched in 1996 and Google was introduced on the interna-
tional market in 1999. What happened to the two search engines? (See, e.g., 
Wikipedia articles on search engines).
2. Can the “likes” button trigger path dependency? Explain.
3. May path dependence explain why similar businesses, e.g., car dealers, tend to 
agglomerate geographically?